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Coronavirus pandemic
OpinionComment
David Brown
David Brown

Macroscope | As the coronavirus pandemic eases, the US dollar’s fortunes look challenging

  • When the dollar loses its edge, don’t despair – it’s a sign that the global economy is bouncing back
  • The world returning to some sense of normality means Beijing will have to accept a stronger renminbi as the flip side of the dollar losing its lustre

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A woman holds up US dollar and Chinese renminbi banknotes in Qionghai, in south China’s Hainan province, on January 7, 2016. Photo: Xinhua
David Brown

The US dollar can be great barometer for global investors when markets are in turmoil. If the outlook seems uncertain and risk appetite is falling, the dollar offers a solid, safe retreat for investors seeking better protection.

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Conversely, when the dollar falls from grace, it’s a good sign that the global economy is bouncing back, financial stability is steadying and capital flows are heading out of the United States into better investment opportunities abroad.

In the past 12 months, since the Covid-19 crisis first struck, the dollar has provided a good benchmark as risk perceptions have ebbed and flowed. This year may prove more challenging for the dollar as the pandemic eases, posing a potential problem for Beijing as stronger demand builds for the renminbi.

In March last year, as the pandemic deepened and global confidence collapsed in the face of lockdowns, factory shutdowns and the threat of world recession, investors sought sanctuary in any safe haven on offer.

Mainstream government bonds rallied, and the dollar surged with its trade-weighted currency index rising by around 8 per cent from the low-point to its peak during March’s volatile trading conditions.

After the market’s initial shock, the dollar index slowly gave ground as global confidence gradually recovered, risk aversion eased and global stock market sentiment found a surer footing.

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